Emeka Emuwa, CEO, Union Bank
Emeka Emuwa
MD Union Bank, Emeka Emuwa

By JULIUS ALAGBE

The past doesn’t define Union Bank Plc anymore but the road to the future is rocky.  The bank used to be the main contender for the top place in the industry and comes with a cherished history. But the past few years has not been the best for the Stallion, which has been engaged in a fight for survival and relevance. However, its improving performance indicates that the transition may be over.

After a sharp drop in profit after tax from N26.685 billion in 2014 to N18.093 billion in 2018, Union Bank has started to strengthen its fundamentals, and financial year 2018 results attest to that fact that there is hope for the future.

Analysts said that there is strong rivalry in the banking sector, and financial technologies services and activities are making things worse by creeping into the space. The banks that would survive the future must be lean and speedy in attending to their retail and corporate customers’ needs.

Union Bank is one of the few banks that have survived major global economic meltdown including sulphuric local economic issues. The bank in recent time is trying to re-jig its brand image and service delivery, especially how best to serve the customers and achieve sterling financial performance.

On the surface of it, the effort seems to be paying off when you look at how the bank has reinvent itself in the area of operations, with revised culture across its banking halls and investment in technological infrastructures. The management effort has impacted its fundamentals significantly.

At the just concluded investors and analysts conference call, Mr. Emeka Emuwa, the managing director/chief executive officer (MD/CEO), stated that “Our ambition is to be Nigeria’s most reliable and trusted banking partner, leader in retail and transaction banking, sustainability and innovation.

Focus on reliability, trust, leading the retail end and transaction banking may be a tall ambition, albeit achievable; but not without some sort of disruptive and fresh strategy. Some of its competitors have gone far ahead and have captured significant chunks of the market share in the sector.

Union Bank’s investment in artificial intelligence would add more value to its bottom line but not without re-carving its financial products to bring millennial into the net. Strategy, they say is expensive, but it determines who get what”, Ogochukwu Ndubuisi, an independent strategy consultant at MarketForces, said

Union bank’s priority is on building digital footprint, among others, Emuwa said at the conference call. The bank said it is diversifying its funding base. He said the bond issued in was oversubscribed.

BusinessHallmark observes that digital shake up seems to have started impacting operations. In 2018, 96% of transactions volume was conducted on its digital platforms – Online, POS, Mobile, Automated Teller Machines.

Emuwa said; “Our cost to income went up to almost 83% which is higher than we are comfortable with, but it’s combination of reduced earnings and some of the cost elements that went up, include our investment in technologies that have beginning to bear depreciation impact.

At that level, it means that Union Bank incurred as much as N83 on every N100 income generated in 2018. “We are expecting productivity that would come out from those investments. Aggressive efforts to collect loans resulted to decline non-performing loans ratio,” he added.

Union Bank efforts in numbers

But these efforts, as noble as it looks, are yet to translate to exciting numbers. Its financial performance is not looking bad on its own but weighed against industry’s average and direct comparison with its peers, it looks like promises are not a strategy. Analysts are however mindful of various regulatory demands that are impacting banks of this size.

Competition is not key issue, some think but total available cash for banks to trade considering how cash reserve ratio of 22.5% is locking down small banks financial strengths.

At the banking level, in the last five years, precisely from 2014 to 2019, Union Bank  earnings per ordinary share has been sliding, from N1.21 kobo posted in 2014, then N1.06 kobo a year after before it closed financial year 2016 at N0.94 kobo.

At the same time when the bank increased its share capital by about 72% from N8.468 billion to N14.561 billion earnings per share sliced further in 2017 to N0.66 kobo and dropped to N0.63 kobo at the end of financial year 2018. The same pattern was seen at the group level except for year 2016 when earnings per share picked up. As such, it has been a rough ride for investors.

Rising impairment loss on the financial assets has been the “Judas” of the bank’s effort to sail strongly. At the group level, impairment on credit losses rose from N19.244 billion in 2014 to N19.561 billion in 2015 before it dropped to N17.186 billion in 2016. The group was worst hit in 2017 with increased exposure to default risk as the group booked N25.317 billion against its income statement.

The amount booked as impairment charge on credit losses was about 24% of net operating income for the period. In 2018, efforts seem to have paid off as the bank wrote back N2.992 billion to its net operating income.

Operating expenses also betrayed the results in sequential manner over the years. The group overhead rose from N59.419 billion in 2014 without a breakout of sort till 2018 when it expended N75.04 billion on its operations. Unfortunately, as operating expenses were rising, net operating income continue to decline year on year. Then, the bank had to deal with its bogus impairment charge.

 

Where is Union Bank going from here?

Union Bank Plc’s total assets increased marginally to N1.463 trillion at the end of financial year 2018, having expanded by less than 1%from N1.455 trillion in 2017. However, the bank total liabilities dwarfed total assets growth as it expanded by 11.34% from N1.112 trillion to N1.238 trillion.

On the profitability performance, Chief Financial Officer, Joe Mbulu, commenting further on the 2018 results said: “Gross revenues declined by 11% to ₦145.5 billion in 2018 from ₦163.8 billion in the previous year as a direct consequence of the loan book clean-up and resolution of key exposures.

“Notwithstanding significant investments to execute our strategy including expanding our agency banking footprint and aligning compensation with market for our entry to mid-level employees which increased operating expenses by 12% from ₦66.7billion in 2017 to ₦75.0billion as at December 2018, we are pleased that our core business delivered a 33% growth to our top-line PBT”, Mbulu added.

“In addition to our successful fund raising activities during the year, we will further support future growth and creation of high quality risk assets in 2019 through a Tier II capital raise. This will boost our Capital Adequacy Ratio, which is currently at 16.4% and remains above the regulatory limit”.

Tough economic environment impacted on banks performance in general in 2018, many banks muted lending in 2018, as operators favoured cleaner books and took cover in the fixed income market. For Union bank, gross loans declined by 7% from N560.7 billion to N519.7 billion.

Interest income went down by 11.39%, from N124.55 billion in 2017 as the bank made N110.37 billion in 2018. Meanwhile, expenses incurred to generate this level of income decline just as volume of interest earnings assets receded. In 2018, Union bank expended N55.016 billion as against N57.88 billion used to finance interest earnings assets in 2017.

This indicates that the bank generated more from interest earnings assets than it expended. Union bank spent N44.17 on every N100 generated from its interest earnings assets in 2018 compare with N52.44 the bank incurred directly on every N100 interest earned in 2017.

Apart from its cost savings, management effort targeted to reduce impairment charge is commended. In fact, there was a write back of N3.374 billion instead of usual impairment charge. This strengthened 2018 results as net income after impairment charge on credit losses jerked up massively by 43%, from N41.06 billion in 2017 to N58.724 billion in 2018.

More business transactions from customers raised the bank net income from fees and commissions by 13.61% to about N11.6 billion from N10.207 billion in 2017. But net trading income went down by 7.88% to close the year at N8.41 billion compare with N9.129 billion in 2017. However, other operating income declined by more than 51%, just as the bank non-interest related income shrank by 10.55% from N39.295 billion to N35.151 billion.

Also total expenses for the group spiked by 12.46% from N66.728 billion to N75.040 billion. The increase was due to improved welfare of the members of staff on one side and other overhead drivers on the other.

Profit before tax increased by 32.56% from N13.92 billion to N18.453 billion while profit after tax increased by 39% to N18.09 billion on the back of more than 60% reduction in tax obligations. Overall, fundamentals improved in 2018. Key performance indicators were in the green, the bank achieved 49.26% increase in profit margin in 2018. Also return on equity went up significantly by 117.2% and closed the year at 8.02% as against 3.79% in 2017.

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